Taxation

The basis on which profit or losses are shared is a matter of agreement among the partners and may not necessarily be the same as their capital contribution ratio. The equity of a partner in the net assets of the partnership should be distinguished from a partner’s share in profits or losses.

The accounting process of a partnership transaction and sole proprietorship is basically the same, the difference between the accounting of two business type lie in the way of presenting partners’ capital in the balance sheet and in the distribution of partnership’s earnings to the partners.

What is the difference in profit distribution between sole proprietorship and a partnership?

In sole proprietorship, the profits or losses are all taken by the only owner, the sole proprietor.

In partnership, the profits or losses are divided based on the partners’ agreement.

The accounting for partnership operation is concerned with:

Accounting treatment of P/L

Proper distribution of profit or loss

Preparation of financial statements

Statement of Financial Position (Balance Sheet)

Statement of Financial Performance (Income Statement)

Accounting treatment of Partnership’s Profit or Loss

Determination of proper income or loss

Revenues

xx

Less: Operating expenses

xx

Net Income (Loss)

xx

Journal entry to distribute the net income:

Income Summary

xx

A, Capital

xx

B, Capital

xx

Journal entry to distribute the net loss:

A, Capital

xx

B, Capital

xx

Income Summary

xx

RULES FOR THE DISTRIBUTION OF PROFIT OR LOSSES

PROFITS

If the profits will be divided according to partners’ agreement

If